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No. 27 — July 14, 2000

Feature Article

WHAT HAPPENED TO JAPAN'S ECONOMY IN THE 1990S?

Arthur J. Alexander

Summary

No single factor was responsible for Japan's economic problems during the 1990s. Rather, a wide range of developments, many of which had their origins in earlier periods, can be blamed. Long-term growth has slowed to a rate typical of other advanced countries — around 2 percent annually. Overall productivity is relatively low and is lagging seriously in many high technology industries. Business has overinvested. These two factors have combined to produce rates of return that are well below those of the United States and major European countries. Finally, the financial system remains saddled with the bad loans and the wrecked balance sheets generated by the collapse of the asset-price "bubble" at the start of the 1990s.

Given these severe constraints, the bare 1 percent annual rise in real gross domestic product per capita that the Japanese economy eked out over the course of the 1990s should not be surprising. Collapsing business investment was the main cause of the drastic slowdown. That plunge was abetted by a weak banking system and, after 1996, a cutback in lending, especially to smaller firms. Huge government budget deficits helped to keep the economy from sinking even lower. However, the flood of red ink was more the result of shrinking tax revenues than of explicit policies designed to increase spending or to reduce taxes.

Since the banking system is a crucial source of financing for business as well as the channel through which monetary policy is effected, understanding the sources of the industry's difficulties — which arose mainly from loans made during the bubble period of the late 1980s that later soured — is important for future policy. Like recent banking crises in other countries, Japan's problems stemmed from a deregulated financial system that lacked the appropriate supervisory and oversight systems. Tokyo's forbearance of troubled banks and weak corporate governance ensured that the banking industry would be caught in a protracted bind; that, in turn, compounded the crisis and raised the political costs of any resolution. At the same time, a regulatory shift in 1997 reduced the moral hazard that had been created by the Ministry of Finance's guarantee that no bank would fail. The withdrawal of this assurance made banks more cautious just when their diminished capital was beginning to restrict lending.

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Weekly Review

MORI REELECTED PRIME MINISTER; APPOINTS STOPGAP CABINET
--- by Barbara Wanner

Liberal Democratic Party President Yoshiro Mori, as expected, was easily reelected as Japan's prime minister July 4, receiving 284 of the 479 votes cast in the Diet's 480-member lower house and 133 of the 242 votes recorded in the 252-seat upper house. His closest rival, Democratic Party of Japan leader Yukio Hatoyama, garnered 190 combined ballots. Mr. Mori — better known for his back-room political deals than for his policy expertise or visionary leadership — then predictably appointed a cabinet virtually identical in terms of party representation to his early April administration. With 338 members in the Diet, the LDP received the lion's share of the 18 cabinet posts. Its two governing partners, the New Komeito and the New Conservative Party, received one position each (see Table).

 

JAPANESE CORPORATE GOVERNANCE CONTINUES TO EVOLVE
--- by Jon Choy

Even though this year the great majority of Japan's publicly traded companies followed traditional practice and held their annual shareholder meetings the same day, evidence is mounting that attitudes toward corporate governance and shareholder rights are evolving at a faster pace. Besides changing the structure and the duties of executive boards and top managers, companies are paying greater attention to investor relations. Such shifts are having a major impact on corporate strategies. Observers agree, however, that the process has limits and that Japan is not likely to adopt without reservation U.S. corporate governance structures and practices.

 

EPA PRICE REPORT PAINTS CONFUSING PICTURE
--- by Douglas Ostrom

Pity the plight of the Economic Planning Agency officials assigned to write the annual report on consumer prices that the organization released in early July. How should last year's drop in retail prices be explained? Conventional wisdom would attribute what was just the second fall ever in Japan's present-day consumer price index on either a calendar or a fiscal-year basis to structural reform and increased competition as regulatory barriers eroded. However, the EPA analysis indicated that these effects were minor. Another obvious explanation is the run-up in the yen's value, which manifests itself in two ways: in falling prices as expressed in yen and in higher prices when converted into dollar equivalents.

 

G-7 POOR-COUNTRY DEBT-RELIEF INITIATIVE FACES DIFFICULTIES
--- by Marc Castellano

At a July 8 meeting in Fukuoka on Kyushu, finance ministers of the Group of Seven industrial nations acknowledged that implementation of the G-7 poor-country debt-relief initiative is being held up by a number of obstacles. Secretary of the Treasury Lawrence Summers, Finance Minister Kiichi Miyazawa and their counterparts had gathered in preparation for the July 21-23 summit of the leaders of the G-7 countries plus Russia on Okinawa, where the progress of the watershed loan-cancellation program will be discussed.

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